Privatization of Social Security Term Paper

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Privatization of Social Security

A number of things have been happening to give Americans the idea that the social security system in this country is about to collapse.

For one, with rising affluence, birth rates fall. This would not be a problem except that advances in medicine and better preventative care is also extending the American lifespan. Formerly, there were very few senior citizens as a fraction of the American population; a lot of people lived to see their 65th birthday, fewer lived to 75, and hardly any into their 90s. Now, however, the proportions are upside down; very few people are being born and those who are living much longer. The pyramid is becoming inverted.

This spells trouble for Social Security because it means that in the long run there are going to be fewer and fewer people paying into the Social Security system and more and more receiving payments from it. Even were there no other reasons to worry about the system, this trend alone will inevitably result in the system running an annual deficit, simply untenable over the long run.

However, this is not the only problem facing the social security system right now.

Another egregious problem is the government's practice of dipping into payroll taxes designated for social security to fund other projects. If a senator from Wisconsin would like to fund a museum in Beloit, then almost all he need do is write a check; the money will be withdrawn from the social security fund. We should rename it the Social Slush System instead of the Social Security System. The money itself is far from secure!

Every candidate for federal office lists "social security reform" somewhere on his list of hot topics, but once in office, nothing ever gets done. This is another problem; the apathy of the American citizen in response to politicians' refusal to live up to their promises. Why shouldn't political candidates make pie-in-the-sky promises about reforming the system when they have no intentions of following through? No one is going to hold them to it.

Now however, perhaps things are going to change. The Baby Boomer generation is approaching retirement age; there are a lot of them and they're starting to panic. It is bad news for the system if nothing is done, but good news for change...if the kind of change that comes is good for everyone.

There is a danger that some bright politician is going to get the idea that fixing the Social Security System will require raising payroll taxes on the young set.

One alternative, the one favored by the current president, is to privatize social security. By this, he intends to offer Americans the choice of which investment fund to put their FICA payments. The problem with this is that, first of all, it will cost an incredible sum to roll over, and second of all, once everyone's money is in the stock market, there goes the security in social security. All it will take is another Enron, another dotcom-like bubble, and the accumulated life savings of tens of millions of Americans will vanish.

If something like that happens, it will probably happen without warning, like the crash of '29, with similar results. The reason is that, flush with money, managers of investment funds do what...they invest. The money flowing into the Social Security System is hardly trivial, and when it gets dumped into stocks, firms are going to build and expand their facilities and operations, build and expand. However, the amount of building and expansion that goes on as a result of an influx of all this nice fresh capital may not be realistic given other economic factors, such as competition.

Imagine all the American automobile manufacturers use this inrush of capital to increase production 20%. It's quite feasible since risk-averse investors are more likely to invest in companies that, by their very mass, seem unlikely to topple. So big companies will probably enjoy a disproportionately large share of the new capital, and they aren't going to just put it in the bank.

But what happens if the companies build and expand past the market's ability to absorb all this extra production? A shakeout is inevitable, and even if GM doesn't crumble, its stock value is going to suffer and a) a lot of people are going to lose their shirts and b) only the most risk-insensitive village idiot is going to sink more money into GM stock. Let us not forget the fate of all GM's the upstream suppliers; it won't just be GM that suffers, it will be the firms that supply the windshields, power steering units, wire, sheet metal, tires, everything. It won't be a trickle-down effect, but a tsunami-down effect.

But the dark cloud of an overheated stock market has a silver lining. Few people are savvy enough to be able to pick which stocks or funds are the best performers, but there are people who are just that savvy, and they work for companies like Charles Schwab, U.S. Bancorp Piper Jaffray, Bear Stearns, J.P. Morgan and Morgan Stanley. When the gold rush is on, you can take a big risk and maybe strike it rich with your claim in the hills, or you can play it safe and sell picks and shovels. You might make less money than someone who strikes it rich, but you'll be making a lot more than those who don't.

If the current brand of reform is implemented, investment firms are going to be the firms that are most likely to gain; people will be consulting them like never before and their own market caps are going to go sky high.

There are plenty of unanswered questions, and unanswered questions make people uneasy. Is everyone going to be required to put part of their social security tax into stocks, or will it be a matter of choice? Perhaps some people would prefer to keep their money in the social security system exclusively. When the market performs poorly, what happens to the people set to retire at that time? If you needed the money for some emergency expense, would you be able to withdraw it early? Once enrolled in the program, can one withdraw from it, or vice versa? Will there be restrictions as to how much one can invest and in what? These are some of the questions people are asking, but there are plenty more (Rosenbaum, p. 4).

In a St. Petersburg Times article, people voiced some of their concerns, "The idea of diverting Social Security money to private accounts is a great idea for a few, but a terrible one for most," said Joseph Moran, 35, of St. Petersburg (Huntley, par. 2).

If the planned reforms are unrealistic, what alternatives might we devise which are not? We can't just raise taxes to make up for the difference; people wouldn't stand for it. Nor can we reduce benefits for the same reason.

What we can do is something we ought to have done from the very beginning, ensure that money earmarked for social security is used exclusively for social security. That would be an important first step. No one who plans social security reform can be taken seriously who does not also propose such strict guidelines about use of its funds.

Second, forget about the stock market as an alternative. The whole point of government is to serve and protect the people, and what it ought to be doing is working tirelessly toward improving citizen's standards of living. If people start taking some fraction of their social security taxes and putting it into stocks or some other kind of financial creature, there are going to be some people who do well, but many others who will be worse off. They'll be sorry for not leaving 100% of their social security taxes in the social security system. Yes, it will probably be their own fault for investing unwisely, but why give people another way to ruin themselves? Remove the stumbling blocks to our long-term financial security, don't add to them!

Thirdly, the hemorrhage of cash that has gone out of the social security system needs more than a tourniquet. The system needs a transfusion. Funding is going to have to be cut for a lot of government programs.

If our armed forces were only half as well equipped as they are, the United States would still be king of the hill. We already posses an almost Zeus-like ability to hurl destruction to any point on the face of the world on nearly no notice from practically any other point; how much more money do we need to spend on advanced weapons systems? What will be next, orbiting death ray satellites? Do we really need such things? Ok, maybe we could use one or two death ray satellites to deal with the occasional bin Ladin or Hitler, but most of the time aren't cruise missiles sufficient? There are certainly many defense projects which are redundant or frivolous…

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